Matt Yglesias

Housing and Inequality

(cc photo by Nesster)

One curious consequence of runaway income inequality in the United States is that it’s produced a bumper crop of research (not sure I’m remembering it right, but I think Marx talks about this in The German Ideology) aimed at explaining away runaway income inequality. At any rate, Reihan Salam tweeted out this paper from Enrico Moretti the other day:

A large literature has documented a significant increase in the return to college over the past 30 years. This increase is typically measured using nominal wages. I show that from 1980 to 2000, college graduates have increasingly concentrated in metropolitan areas that are characterized by a high cost of housing. This implies that college graduates are increasingly exposed to a high cost of living and that the relative increase in their real wage may be smaller than the relative increase in their nominal wage. To measure the college premium in real terms, I deflate nominal wages using a new CPI that allows for changes in the cost of housing to vary across metropolitan areas and education groups. I find that half of the documented increase in the return to college between 1980 and 2000 disappears when I use real wages. This finding does not appear to be driven by differences in housing quality and is robust to a number of alternative specifications. The implications of this finding for changes in well-being inequality depend on why college graduates sort into expensive cities. Using a simple general equilibrium model, I consider two alternative explanations. First, it is possible that the relative supply of college graduates increases in expensive cities because college graduates are increasingly attracted by amenities located in those cities. In this case, higher cost of housing reflects consumption of desirable local amenities, and there may still be a significant increase in well-being inequality even if the increase in real wage inequality is limited. Alternatively, it is possible that the relative demand of college graduates increases in expensive cities due to shifts in the relative productivity of skilled labor. In this case, the relative increase in skilled workers’ standard of living is offset by higher cost of living. The empirical evidence indicates that relative demand shifts are more important than relative supply shifts, suggesting that the increase in well-being inequality between 1980 and 2000 is smaller than the increase in nominal wage inequality.

You can think of the baseline dispute about inequality as being that on the left we think it would be a good idea to try to redistribute some wealth and income away from folks at the top and either give more money or more services to the rest of the population. On the other side are folks who think the reverse. And this housing issue, like the case of the expensive refrigerator, strikes me as something purporting to debunk concern about inequality that in fact is just offering an example of why the right is correct to think that redistribution would be a good idea.

The way I read this research result, if we take a bunch of money away from rich people it will cost them relatively little in welfare since almost half of the excess income of the rich is going to bidding up the price of housing in the kinds of places where rich people can find jobs. If they all had less money, they’d all live in equally good houses; the houses would just be cheaper. But the money acquired through taxation could be used to provide services—better transportation infrastructure, better teachers, healthier food, more medicine—that have real value to the middle class and the poor.

20 Responses to “Housing and Inequality”

1. Rich in PA Says:
   September 11th, 2009 at 9:20 am

   And this housing issue, like the case of the expensive refrigerator, strikes me as something purporting to debunk concern about inequality that in fact is just offering an example of why the right is correct to think that redistribution would be a good idea.

   Um, that last part must have some typo of consequence.

2. Jeffrey Davis Says:
   September 11th, 2009 at 9:24 am

   Brad DeLong has a chart up about the increase in college costs over time. The increase isn’t due to living in LA, Santa Cruz, or Boston.

3. Mike S Says:
   September 11th, 2009 at 9:24 am

   Median income is lower than 10 years ago.

   New research is significantly strengthening the case for growing US income inequality

   Top 1% gets 24 dollars out of every 100 earned.

   In Brazil, there is a huge market for bulletproof and explosion reinforced vehicles. This is for people of upper class, but not enormous wealth. If we keep moving in the same income direction, this is going to be a growth industry in the U.S. Don’t tell the criminals!

4. abb1 Says:
   September 11th, 2009 at 9:35 am

   What bullshit. This just obfuscates the real issue: that a very small portion of the population amassed (by stealing from the rest of us, including, of course, the college graduates) a huge amount of wealth. These are people with incomes of tens and hundreds of millions/year – or maybe sometimes with no income at all, but owning billions of dollars worth of of capital. Their ill-gotten wealth simply needs to be expropriated, and maximum income limit needs to be established.

5. bob mcmanus Says:
   September 11th, 2009 at 9:40 am

   “…if we take a bunch of money away from rich people…”

   Or the left thinks of this as a redistribution of property from the individual to state (or other individuals) the while right views the same process as a redistribution of political power from the individual to the state or other individuals

   The urbanization or intellectual work in high cost-of-living areas not only weakens the political power (to the extent property implies power) of intellectuals but accompanied by the suburbanization of lower-skilled labour physically and socially separates the two revolutionary classes

6. wardaw Says:
   September 11th, 2009 at 9:41 am

   I’m not an expert in Economics or Marx, but the problem is in the belief in rational market theory where prices rise only according to some rational relation between supply and demand. Houses are not necessarily more expensive everywhere because certain people can afford to pay for them but because prices can be fixed by creating scarcity and through downright collusion.

7. Rich in PA Says:
   September 11th, 2009 at 9:51 am

   Wardaw nails it. This (rewards to financial industry kingpins) isn’t the free market at work–rather, it’s a throwback to a pre-modern, patrimonial system in which the people at the top take everything they could possibly want, simply because they’re in a position to do so. There’s no market element at all.

8. pjcamp Says:
   September 11th, 2009 at 9:53 am

   Of course, during the transition period from expensive to inexpensive housing, somebody takes a very nasty haircut.

   I somehow suspect it will not be the wealthy that do so.

   \

9. OGT Says:
   September 11th, 2009 at 10:07 am

   I don’t think replacing the term college graduates with the word rich is a very accurate substitution. That said, the income tax based on nominal wages already largely does this, moving money from more productive places to less according to a recent study:

   Workers in cities are generally paid higher wages than similarly skilled workers in smaller towns, so they’re taxed at higher rates. That may sound fair, until one considers the higher cost of living in cities, which means those higher wages don’t provide any extra buying power. The federal income tax system doesn’t account for cost of living. So the effect is that workers in expensive cities like New York, Los Angeles and Chicago pay more in taxes even though their real income is essentially the same as workers in smaller, cheaper places.

   The extra burden wouldn’t be so excessive if more federal tax dollars were returned to urban areas in the form of higher federal spending. But according to Albouy’s research, that’s not the case. His data show that more federal dollars are actually spent in rural areas, despite the fact that cities send far more cash to Washington. The net effect of all this is a transfer of $269 million from workers in high-cost areas to workers in lower cost rural areas in 2008 alone.

   Via Richard Florida. Not exactly the Urbanist position.

10. tom veil Says:
    September 11th, 2009 at 10:37 am

    But the money acquired through taxation could be used to provide services—better transportation infrastructure, better teachers, healthier food, more medicine—that have real value to the middle class and the poor.

    And value to the rich, too! That’s why in medieval/traditional economies, rich people spread money among their distant friends and far-flung relatives — at a certain point, you become rich enough that the best thing you can buy, on a purely selfish level, is to have your society be well-cared for.

11. DTM Says:
    September 11th, 2009 at 10:45 am

    I agree Matt doesn’t really connect the dots. If college grads in cities are collectively paying more for their housing on an ongoing/net basis than that housing really costs to provide, then where is that surplus ultimately going? Because that is the surplus Matt is really trying to reclaim for other purposes, and it isn’t obvious to me that the best way to reclaim that surplus is to tax residents in cities and hope they pass the incidence of that tax on to whomever is getting that surplus.

    Indeed, if residents in cities are really paying a lot more for housing than the true marginal cost of their housing, that implies someone up the chain is exercising what may be undue market power. And we don’t generally think that sort of problem can be solved just by taxing the relevant consumers.

12. Gene Says:
    September 11th, 2009 at 10:55 am

    I’m with OGT on this, the notion that “college graduate” = “rich” is fatuous. We all know Yglesias can’t spell, now I wonder how well he reads ["The way I read this research result...."]

    And if the “transfer of $269 million” in the quote OGT uses from Richard Florida is not a type (e.g., billion instead of million), thenb it’s too small to worry about.

13. chris Says:
    September 11th, 2009 at 11:30 am

    This finding does not appear to be driven by differences in housing quality

    Assuming, of course, that the location of housing is not part of its quality. Tell that to any real estate agent if you think they need a good laugh.

    Meanwhile, of course, lots of working-class people *also* live in metropolitan areas where they have a high cost of living *and* low and stagnant wages. But they live in different neighborhoods so the rich people’s children don’t have to go to school with the poor people’s children.

14. Pat Says:
    September 11th, 2009 at 11:42 am

    This might all be moot in, say, 50 years, with much better telecommuting capabilities. Or after the apocalypse. Zombies don’t need Park Avenue apartments. They do need $11,000 freezers, though.

    But what you really need are incentives to stay in small towns and rural areas. Stopping subsidies (explicit or implicit) of factory farming and big box stores, and instituting a Medicare-like single-payer health system, for example.

15. Jeffrey Davis Says:
    September 11th, 2009 at 11:47 am

    Not just students. I’ve often marveled at the high cost of being a Bohemian these days. When I was a lad, it was as easy as Thoreau described. No need to live by the sweat of one’s brow etc. The Bohemian neighborhoods of my youth now are brain-crushingly expensive. To live there one must sweat and trot.

16. oboe Says:
    September 11th, 2009 at 12:02 pm

    But they live in different neighborhoods so the rich people’s children don’t have to go to school with the poor people’s children.

    Or walk as far for recreational opportunities. Or be as susceptible to violent crime. Or eat paint chips.

17. John Says:
    September 11th, 2009 at 12:47 pm

    Well, one thing Matt is leaving out is the wealth that those expensive houses represent. Once your kids go to college and you downsize, you get a massive amount back out. Or you can borrow against the equity in your expensive house.

    So it isn’t fully accurate to say that a person making 200k and living in a 2000 sq ft house he bought for $600k is no better off than a person making $100k living in a 2000 sq ft house he bought for $300k (cetibus paribus). While the money is parked in the house he isn’t, but it doesn’t stay parked forever.

18. roger Says:
    September 11th, 2009 at 1:39 pm

    What excellent economics. I love it. This is true science, man. We have to bow oour heads to the great freshwater econ insight: Once you make a lot of money, you spend a lot of money. You are forced to, at gunPoint! Thus, you aren’t really richer at all. It is like a poor man buying a bass fishing boat, for 10,000 dollars, and a supposed “rich” man buying a yacht, for 10 million. In actuality, given the much cheaper fishing donE by the poor man, he is richer than the yacht owner. Q.E.D.

    It is views like these that make freshwater economics the most disgusting and risible play of fake reasoning since that of the the Jesuit in Pascal’s Letters of a Provincial, who explained that dueling isn’t really murder, and is thus a highly Christian endeavor, by the simple act of directing your intention:

    “Show me, with all your directing of the intention,” returned I,”that it is allowable to fight a duel.”
    “Our great Hurtado de Mendoza,” said the father, “will satisfy you on that point in a twinkling. ‘If a gentleman,’ says he, in a passage cited by Diana, ‘who is challenged to fight a duel, is well known to have no religion, and if the vices to which he is openly and unscrupulously addicted are such as would lead people to conclude, in the event of his refusing to fight, that he is actuated, not by the fear of God, but by cowardice, and induce them to say of him that he
    was a hen, and not a man, gallina, et non vir; in that case he may, to save his honour, appear at the appointed spot- not, indeed, with the express intention of fighting a duel, but merely with that of defending himself, should the person who challenged him come there unjustly to attack him. His action in this case, viewed by itself,will be perfectly indifferent; for what moral evil is there in one stepping into a field, taking a stroll in expectation of meeting a person, and defending one’s self in the event of being attacked? And
    thus the gentleman is guilty of no sin whatever…”

19. david in norcal Says:
    September 11th, 2009 at 7:36 pm

    Okay, but why the photo of the Munsters’ house?

20. Glaivester Says:
    September 11th, 2009 at 11:02 pm

    But they live in different neighborhoods so the rich people’s children don’t have to go to school with the poor people’s children.

    Or walk as far for recreational opportunities. Or be as susceptible to violent crime. Or eat paint chips.

    As for violent crime, it needs to be understood: The reason that poor people live in neighborhoods with lots of violent crime is that on average, the poor people commit more violent crime. It isn’t that the people live in a bad neighborhood; it’s the behavior of the peopel that makes the neighborhood bad in the first place.

    As for increasing equality, it needs to be pointed out that the U.S. imports a lot of its inequality from other countries.